Gift Tax Fundamentals

The federal government imposes a substantial tax on gifts of money or property
above certain levels. Without such a tax someone with a
sizable estate could give away a large portion of their property
before death and escape death taxes altogether. For this
reason, the gift tax acts more or less as a backstop to the estate
tax. And yet, few people actually pay a gift tax during
their lifetime. A gift program can substantially reduce
overall transfer taxes; however, it requires good planning and a
commitment to proceed with the gifts.

Advantages of Gift Giving

You may have many reasons for
making gifts – for some gift giving has personal motives, or
others, tax planning motives. Most often you will want your
gift giving program to accomplish both personal and tax
motives. A few reasons for considering a gift giving plan
include:

Assist someone in immediate
financial need

Provide financial security for
the recipient

Give the recipient experience in
handling money

See the recipient enjoy the
property

Take advantage of annual
exclusion

Paying gift tax to reduce
overall taxes

Giving tax advantages gifts to
minors

Gift Tax Annual Exclusion

Probably the easiest way to reduce
the size of your taxable estate is to make regular use of the gift
tax annual exclusion. You may give up to $11,000 each year
to as many persons as you want without incurring any gift
tax. If your spouse joins in making the gift (by consenting
on a gift tax return), you may (as a couple) give $22,000 to each
person annually without any gift tax liability.

Unlimited Gift Tax Exclusion

In addition to the $11,000
exclusion, there is an unlimited gift tax exclusion available to
pay someone's medical or educational expenses. The
beneficiary does not have to be your dependent or even related to
you, although payment of a grandchild's expenses is perhaps the
most common use of the exclusion. You must make the payment
directly to the institution providing the service – the
beneficiary himself or herself must not receive the payment.

Gift Programs and Your Estate

Use of the gift tax exclusion in a
single year may not affect your estate tax situation
significantly, but you can reduce your taxable estate
substantially through a planned annual program of $11,000 (or
$22,000 if you are married) gifts. All gifts within the
exclusion limits are protected from federal estate taxes.

In addition to reducing the size of
your estate, another major tax advantage of making a gift is the
removal of future appreciation in the property's value from your
estate. Suppose that you give stocks worth $50,000 to your
children now. If you die in 10 years and the stock is worth
$130,000, your estate will escape tax on the $80,000 appreciation.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.